Global Motors: decades of corrupt collusion with the foreign-aid industry have left General Motors, once the colossus of the auto industry, facing extinction.

General Motors is not merely the world's largest car manufacturer; it is an institutional icon of American capitalism, a pillar of our manufacturing economy, and for decades has been among the bluest of blue-chip investments. As the industry leader in one of America's signature industries, GM is regarded by economists sociologists, and pundits as a bellwether of our economic fortunes.

Thus it's a matter of no small concern that GM, the once-unassailable colossus of the auto industry, appears destined either for extinction or a taxpayer-funded bailout.

On April 18, GM announced first quarter losses of $1.1 billion. That dismal report came two weeks after Moody's Investor's Service cut GM's debt rating to what a Reuters report called "a step above junk status." The company is saddled with roughly $300 million in debt and a descent into outright junk status would make it difficult--perhaps approaching impossible--for GM to borrow money as interest rates in to increase.

"There seems to be no mechanism for a renewal of the company short of bankruptcy," commented Britain's Supplier Business journal. A leveraged buy-out seems extremely unlikely at best, since GM's pension and health care liabilities represent "a poison pill to would-be acquirers.

Over the past several years, GM has capitalized on the Federal Reserve's efforts to hold down interest rates by avidly promoting zero-interest no-money-down offers to car buyers. And also thanks to the Fed's loose money and credit policy, GM's financial subsidiary, General Motors Acceptance Corp (GMAC), has become the company's most profitable concern.

"If GMAC were an independent company, it would be the eighth-largest U.S. bank," observed a March 23, 2004 Bloomberg News report. While GM's auto sales have remained stagnant, "'it's the financial unit GMAC that [has been] most crucial to General Motors' performance." In 2003, "the world's No. 1 automaker earned far more profit--$2.8 billion, or 87.5 percent of the $3.2 billion total--lending money, writing mortgages and selling securities than it did selling its cars and trucks.... Now, GMAC's ability to prop up its parent could be jeopardized because borrowing costs will rise 'at some point,' says Federal Reserve Chairman Alan Greenspan."

Since those words were published a year ago, "at some point" has arrived--with the expected results for GM's financial arm. While GMAC remains the "only bright spot in GM's portfolio," commented the April 6 Cincinnati Enquirer, its profits "are quickly coming under pressure because of higher interest rates." This means, once again, that GM will have to borrow money, at rapidly escalating interest rates, in order to finance car leases and purchases (as well as GMAC's home mortgage loans). However, customers who bought cars in recent years "will be paying lower interest rates until they turn in or sell their vehicles"--thereby creating another revenue shortfall for the company. Accordingly, it's not surprising that GMAC, the conglomerate's only profitable concern, has recently been rated two steps above junk bond status.

Many of GM's problems stem from a bad business model in which a supposed automobile manufacturer has made seven times as much profit from lending money than it has from building and selling cars--a model based in large part on the engineered boom and bust cycles of the Fed's own monetary machinations. GM's decline has also been encouraged by a corrupt relationship with the federal government's foreign aid bureaucracy, which has subsidized the company's efforts to move production overseas--especially to Communist China and the former Soviet Union.

Wouldn't You Rather Drive a Dragon?

Forbes reported on April 19: "China was GM's second-largest global market last year and has been a major source of profits ... in the past two years." While U.S. sales have remained sluggish, GM sold more than 30,000 cars in Communist China during the first quarter of 2005. Since 2001, GM has spent $3.5 billion to build manufacturing plants in China. Last year it announced a deal to purchase $6 billion in Chinese-made auto parts. During the same period, it has laid off an estimated 37,500 workers in the United States.

GM was one of the first U.S. corporations to open manufacturing operations in Communist China. In 1985, the company announced a 10-year deal between its Detroit Diesel Allison subsidiary and Communist China's state-run Qijian Gear Works to build transmissions. In 1992, GM unveiled a joint venture with China's state-owned Jinbei Automobile Co. to build compact pickup trucks--a pact described by the Wall Street Journal as "one of the largest U.S. investments in China [immediately following] the Tiananmen Square massacre of 1989."

Five years later, GM announced another joint venture with Jinbei to establish a light-truck plant--building mainly Chevy S-10 crew-cab pickup trucks and Blazer SUVs--in Shenyang. At the time, GM was also building a $1 billion factory in Shanghai geared to turn out as many as 100,000 Buick sedans a year. Two years later, GM, citing concerns about "overproduction," shut down the historic Buick City assembly plant in Flint, Michigan--and then promptly announced it was opening a Buick assembly plant in Beijing.

Thanks in part to GM's assistance, Beijing is gearing up to absorb much of the world's automobile market. "After decades of riding global car makers' coat-tails and churning out clunky cars few wanted, upstart Chinese firms are flexing their muscles, designing sedans that threaten to engulf world markets," reported CNN on April 16. "Now, the likes of General Motors Corp. and Toyota Corp. are getting increasingly nervous about the country's vaunted export might, afraid that automotive history--ala Japan and South Korea --might repeat itself." If GM is genuinely "nervous," its corporate leadership must have the foresight of an easily distracted adolescent, since this development was an entirely predictable outcome of GM's role in building Beijing's industrial base.

GM has played a similar role in Russia and the nations of the former Soviet Bloc. In early April, amid quiet but building speculation about a possible round of GM cutbacks and layoffs, the company announced plans to build a $400 million engine and power drive plant in Russia. Four years ago, GM began a joint venture with Russia's AvtoVAZ to build Russian-engineered cars, most of which sell for less than $5,000 per vehicle. Forty percent of the GM/ AvtoVAZ venture was underwritten by the European Bank for Reconstruction and Development (ERBD), which in turn draws 10 percent of its capital from U.S. taxpayers. The combine's marquee product, the Niva sports utility vehicle, sells for about $8,000 in Russia and between $10,000-$11,000 when marketed in Western and Eastern Europe or Mexico under the Chevy brand--where they compete with better built, but more expensive, U.S.-made exports.

GM began to outsource production to Eastern Europe and the former Soviet Union in the late 1980s and early 1990s. The November 8, 1990 Los Angeles Times described an agreement between GM and Czechoslovakia's state-owned BAZ auto company to set up a car assembly plant in Bratislava. GM, which had already established a $150 million Hungarian auto factory, was also in final negotiations with the Hungarian government to build a second one in Szentgotthard.

Subsidized Outsourcing

These outsourcing decisions are tied together by a common thread: in practically every instance, U.S. taxpayers are tapped to subsidize loans and loan guarantees used to finance the export of auto manufacturing overseas. One of the chief conduits of this corrupt corporate welfare is the Export-Import Bank (Eximbank), created in 1934 during the FDR administration for the express purpose of financing trade deals with Josef Stalin's Soviet regime. At present, Eximbank provides over $15.5 billion in taxpayer-subsidized loans or loan guarantees annually.

But Eximbank didn't really go into business until President Richard Nixon signed an October 18, 1972 "Presidential Determination" authorizing loans and loan guarantees to promote trade with the Soviet Union in the name of "detente." Among the first fruits of this arrangement was the notorious Kama River truck factory, which turned out hundreds of thousands of heavy trucks and truck engines each year--as well as the personnel carriers and other military vehicles used in the 1979 Soviet invasion of Afghanistan. Eximbank underwrote 45 percent of the cost of building the Kama River factory, and GM was among the project's prime contractors.

Since 1985, Communist China has become the largest Asian beneficiary of Eximbank loans and loan guarantees. Additional billions have been provided by the World Bank, the Asian Development Bank, and the International Monetary Fund, all of which draw on U.S. taxpayer subsidies. All of those loans--which are often made on almost concessionary terms--reduce the pool of available capital for loans to U.S. companies that seek to keep their manufacturing jobs here at home. This is particularly true now that commercial interest rates have begun to climb.

In this respect, GM has, once again, been a bellwether. Since 2000, notes Vermont Representative Bernie Sanders (a self-described socialist who, to his credit, opposes corporate welfare), "General Motors has received over $500 million in direct loans and loan guarantees from the Export-Import Bank. The result? GM has shrunk its U.S. workforce from 559,000 to 314,000."

Nearly a decade ago, Mark Hogan, GM's head of operations in Brazil and Argentina, declared: "The goal in the very near term is to have fifty percent of our capacity outside the United States." In fact, as the Wall Street Journal reported at the time, GM's goal appeared to be removing production from the Western Hemisphere, since "GM's days of building new plants in North America may be over."

Sedans for Saddam

Not all of GM's outsourcing plans have come to fruition. Following the first Gulf War in 1991, official inquiries were launched both in the U.S. and Great Britain into "Iraqgate"--the use of taxpayer-supported loans to build up Iraq's arsenal. The pipeline for many of those loans was the Atlanta office of Italy's Banca Nazionale del Lavoro (BNL), a notoriously corrupt international financial organ that was deeply entwined with various intelligence, underworld, and terrorist entities. In August 1989, federal investigators raided BNL/Atlanta's office and arrested manager Christopher Drogoul, who had engineered many of the subsidized loans to Iraq.

Referring to findings of Iraqgate investigators, the October 12, 1992 Wall Street Journal reported that GM had waged "one of [the] corporate sector's most tireless campaigns for government trade credits," via the Eximbank, to build factories in Iraq, as well as to facilitate several large auto purchases by Saddam's regime.

With Drogoul in tow, a team of GM negotiators visited Baghdad in the spring of 1989 to work out a $700 million deal that was to include building an auto and light truck plant and the sale of at least 80,000 automobiles. GM and Drogoul also sought a two-year, $134 million loan to underwrite the sale of 15,000 Chevrolet Cavaliers, and a separate $154 million loan for 10,000 Oldsmobile Cutlass Cieras, which were to be handed out by Saddam as party favors to loyalists.

In effect, GM, with Drogoul's capable assistance, was working on an arrangement to have U.S. taxpayers buy its automobiles on behalf of Saddam's government. Having Eximbank guarantee the loans, observed federal investigator Arthur P. Wade, Jr., "was a way for GM to get profits up front." Efforts to consummate the deal were underway right up to the Iraqi invasion of Kuwait in August 1990.

During this same period, with GM accepting federal subsidies to move operations offshore to Eastern Europe, Communist China, and elsewhere, GM was closing dozens of factories and cutting tens of thousands of jobs in the United States. In 1991, GM announced a four-year program to close 21 factories, cut 74,000 jobs, and slash capital spending "in a broad retrenchment aimed at returning to profitability in North America," reported the December 19, 1991 Wall Street Journal.

Backing the "Free Trade" Scam

Even as it downsized its operations in the U.S., GM's corporate leadership ardently supported passage of the so-called North American Free Trade Agreement (NAFTA) between the U.S., Canada, and Mexico in 1993. Critics of the proposed trade pact, pointing to Mexico's vast pool of low-wage labor and the maquiladora factories springing up on their side of the border, predicted that its enactment would result in a massive exodus of manufacturing jobs to Mexico. Then-GM CEO John F. Smith, Jr. insisted that the opposite would be the case.

Noting that GM had "been a strong supporter of NAFTA from the outset," Smith predicted: "NAFTA will create new jobs in all three countries as trade among them increases." Describing predictions of massive job losses in the auto industry as "especially alarming and ludicrous," Smith declared that those who feared the agreement would "somehow drain jobs from the U.S. to Mexico ... [are] just dead wrong."

In fact, those predictions have proven to be entirely sound. Four years alter NAFTA's enactment, Mexico was running an $11.9 billion trade surplus in the automobile market--exporting more than 560,000 cars to the U.S. while importing only 46,000. (It's reasonable to assume that the U.S. share of the Mexican market will continue to decline as cheap Russian-made "Chevy" SUVs become available.)

NAFTA, as this magazine has amply documented in the past, is the first installment of a program to merge the Western Hemisphere into a European Union-style mega-state, using "free trade" as an economic lure. The groundwork for this campaign was laid in the 1965 Canada-United States Automotive Agreement (commonly called the "Auto Pact"), described at the time as a "limited free trade" agreement. In retrospect, the agreement was clearly a precursor of NAFTA (as well as the proposed Central American Free Trade Agreement), in that it was designed to begin the process of political merger.

Prior to 1965, Canada's domestic auto industry was practically nonexistent, with most of its manufacturing plants owned by the Ford Company. Under the terms of the Auto Pact, recounted a 1996 Wall Street Journal report from Toronto, the "Big Three" U.S. auto makers (Ford, Chrysler, and GM) "agreed to make at least one vehicle in Canada for every one sold in Canada, in return for duty-free exporting and importing." This amounted to a corporate subsidy of Canada's auto manufacturing industry--in other words, foreign aid disguised as trade.

In 1996, a Canadian economist pointed out that "one in every five jobs in Canada depends on the automotive industry," with auto manufacturing replacing pulp and paper as the nation's most important industry. Within a few years, Canada's huge automotive trade deficit with the U.S. quickly became a trade surplus. Not surprisingly, Japanese and Korean auto makers, eager to exploit duty-free exporting opportunities to the U.S., set up manufacturing operations in Canada. Just as importantly, notes a Canadian Broadcasting Corporation documentary, "the Auto Pact also tied Canada's fortunes more closely than ever to its southern neighbor"--a necessary step toward the ultimate amalgamation of the hemisphere.

What's Good for GM?

During 1953 Senate confirmation hearings into his appointment as Eisenhower's Secretary of Defense, then-GM President Charles Erwin Wilson was asked if he would find himself in a conflict of interests if confirmed. Perhaps somewhat ingenuously Wilson replied that from his perspective, "what [is] good for the country [is] good for General Motors, and vice versa."

There is more truth to Wilson's much-maligned (and often-misquoted) statement than most people might appreciate. At the time, GM was the largest single private employer not only in the U.S., but in the world; only state-run entities in Stalin's Soviet Union employed more people. From modest beginnings as a holding company for Buick in 1908, GM became a major component in America's rise to unprecedented prosperity and personal mobility. It also played a key role in promoting social mobility, offering millions of American families the means to attain middle-class status.

Just as GM thrived in a relatively free market, it has degenerated as a result of addiction to the Fed's easy credit, and prolonged entanglement with federal export subsidies. And its private sector mission--producing quality automobiles and selling them at affordable prices--has been compromised, perhaps fatally, by management decisions that have led to the company's role in grand globalist schemes, such as NAFTA and the subsidized industrial build-up of China and the former Soviet Union.

In 1979, the Carter administration used tax subsidies to bail out Chrysler, which then seemed bound for bankruptcy. As GM's status worsens, political pressure will build for a similar rescue of GM. Rather than rescuing GM, however, Washington should let the laws of economics run their course. This would mean not only refusing to bail out GM on the taxpayer's dime, but ending all existing subsidies as well.

Rather than one sprawling, politically compromised globalist conglomerate, GM might very well dissolve into several smaller companies--some of which may even construct plants in the U.S. and hire Americans who are willing and eager to make a living building cars.

RELATED ARTICLE: Vroom, boom, and bust.

Much of GM's present financial woes can be traced to interest rates that (until recently) were kept artificially low by the Federal Reserve. This allowed GM to offer zero percent financing/no-money-down deals to prospective car buyers. Those deals were great for buyers, but damaging in the long term for GM, since the Fed was bound to raise interest rates again.

This is a small but potent example of how the Fed engineers "booms" and "busts" in our economy. As Murray Rothbard pointed out in his valuable study America's Great Depression, bank credit expansion "sets into motion the business cycle in all its phases--the inflationary boom, marked by expansion of the money supply and malinvestment; the crisis, which arrives when credit expansion ceases and malinvestments become evident; and the depression recovery, the necessary adjustment by which the economy returns to the most efficient ways of satisfying customer desires."

It's entirely understandable that GM, seeking to boost lagging sales, would take advantage of artificially low interest rates. Likewise, it's understandable that customers would avail themselves of zero percent financing to buy new cars--and that car sales would lag once interest rates began to rise. Had there been no Fed intervention, and market forces been allowed to dictate interest rates, GM would have been forced to find better ways of "satisfying customer demand," and it most likely would be in better financial shape today.

GM's descent into junk bond status, and vague but insistent premonitions of bankruptcy, illustrate that the company's "depression recovery" may be underway. If the company goes under, its demise will, in large measure, be a product of the Federal Reserve's engineered boom-and-bust cycle.